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This winter is crunch time for the hospitality sector
Despite widespread relief over Jeremy Hunt “freezing” alcohol duty in his Autumn Statement last week, the next few months will be like walking a tightrope for many pubs and restaurants.
January and February are invariably the slowest months for the hospitality sector as consumers wrestle with the bills for their December spending and venture out less in the coldest time of the year.
The number of pubs closing in England and Wales rose sharply in the first half of 2023 to 383, almost matching the total for the whole of 2022, when 386 sites were lost, more than two per day.
Worse still, an average of five restaurants closed each day in the first three months of this year, with 569 businesses filing for insolvency in the first quarter, marking the highest rate of British restaurant closures in a decade.
Those trends are continuing as Chancellor Jeremy Hunt tacitly recognised in last week’s Autumn Statement when he said: “I know that for many people going to the pub has become more expensive….So I have decided to freeze all alcohol duty until August 1st next year.”
Drinks company shares duly rose in response.
All hospitality businesses are hoping for a buoyant December because despite what Hunt announced last week, the fight for survival will continue throughout 2024, largely because what he gave with one hand, he quietly took back with the other.
Postponement only
Welcome as it is, the excise duty freeze until August is just that, a postponement in increases, not a permanent halt. Legislation exists for regular increases.
The extension of the 75% discount on business rates to small retail hospitality outlets until 1 April 2025 will mean the average pub not having to pay an extra £12,800 next year.
Again it is a temporary measure that will “help the most vulnerable keep the lights on”, according to Kate Nicholls of UK Hospitality.
But with standard rates rising by 6.4% next year, businesses comprising almost two-thirds of the sector still face a £150m increase.
“This,” she said, “will only put more pressure on consumer prices and inflation, at a time when businesses are still grappling with high costs of energy, food, drink and wages.”
Despite Hunt’s boast that inflation is falling rapidly, food price inflation, including supplies to hospitality outlets, still rose by 10.1% in October.
A recent survey for BIdfoods found that 83% of UK adults have less disposable income due to the cost-of-living crisis, and half are spending less on eating out than they did in 2022.
Just as the global drinks groups are finding themselves less able to impose price rises than they were in 2022, so pubs and restaurants are finding it increasingly problematic to protect their slim margins by passing on the costs of inflation to customers.
Add to that the extra £1.02 per hour on the adult rate of the national minimum wage from April. It might sound insignificant, but for a full-time employee it equates to an extra annual cost of almost £2,000 for each member of staff.
Energy prices have been sliding this year, but independent forecasters predict that they will be rising again after Christmas and there is no government assistance for businesses.
On the rosier side, the size of the UK hospitality market is predicted to grow at a compound annual rate of 2.53% by 2028, but much of that increase will come in the later years as Hunt’s estimated growth in the economy and personal wealth flow through.
In the short-term, however, businesses will continue to feel a considerable pinch as consumers rein in their spending.
Hunt calculated that his headline two-percentage point cut in National Insurance contributions from the start of January will give an average worker earning £35,400 a tax cut of more than £450 a year.
To that add the growth rate in average weekly earnings, which has been close to 8% for several months now, close to the highest rate on record.
So the impression is of the government easing the pressure on purses and pockets.
True it may have eased the pain of the highest combined tax rates on record but because Hunt left income tax thresholds frozen until 2026 at the earliest ever more people will be drawn into paying tax with more than 1 in 5 workers paying the 40% higher rate next year.
Consumer spending has also been negatively affected by the soaring cost of housing.
Earlier this year the Bank of England calculated that its interest rate increases would mean almost a million UK homeowners paying at least £500 more a month to cover mortgage payments by the end of 2026.
Interest rates have been trimmed since then but as fixed rate deals expire homeowners face hefty cuts in their disposable income, reducing the amount available for eating out or visiting the pub.
Much the same is true in the market for privately rented homes.
And the average household is predicted to pay an extra £100 in energy costs next year.
GfK’s UK consumer confidence rebounded in early November to minus 24. That was the sharpest rise since April but still a heavily negative figure.
While all five components of the index rose throughout November, they all remain in negative territory, and have not recovered from the surge in inflation over the past two years.
All the signs point to a very difficult winter and spring for hospitality.
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